No Savings, Too Much Debt, Bear Market...Look Out!

Last week we discussed whether we might be re-entering a bear market - one that started in 2007. I mentioned that a recent survey pointed out that many people have no savings. That's bad enough. But let's not forget that too many people have too much debt too.

This is a bit scary: people having no savings, too much debt combined with a bear market. And don't forget that when we talked about a bear market, the point wasn't to focus on the fact that stocks might go down a lot in the coming months and years. The point was to consider whether the bear market signal that Dow Theory gave us indicates economic recession on the way.

So let's re-phrase this as no savings, too much debt combined with a recession. Can you see where this combination might present all of us - even those of us with jobs and some savings and not a lot of debt? Think about your your family, your town or city, not just yourself. Unless you live on a mountaintop or in a cave somewhere, you'll be affected by others.

Who the Fed "Saved" in 2008 - It's not "Us"

The Fed has intervened in a huge way to forestall the bear market that started in 2007. They did this out of fear of what could happen if the economy were allowed to take its natural course. It's natural course would have been to cause all that debt to be liquidated through bankruptcies. People who owed money would declare bankruptcy and not pay their debts. People who were owed money wouldn't get paid. Pain and suffering would have ensued. So did the Fed do the right thing by trying to avoid the pain and suffering?

Well, consider what they did. They created money out of nothing to buy up all the worst debt so that it wouldn't default. Now they own it. The debtors are off the hook and the people owed the money are getting paid. Of course, they did this to protect banks, not individuals. In the end, bankers continued to collect their bonuses and the banks who invested their money in garbage were let off the hook.

They protected bankers from pain and suffering. Meanwhile, individuals are still sitting with their debts. And now many of these individuals have lost their jobs and can't find new ones. Or if they find a new job, it's frequently a lower-paying job.

So the consequences of not saving and having too much debt are still hanging out there for individuals and families. When we didn't save any money and we supported our standard of living by borrowing - whether it was borrowing too much money to buy a house we really can't afford, or borrowing too much to send our kids to a college we can't afford, or borrowing money to have a car or two or three that we really can't afford - we were essentially living in a fantasy world. Now things are changing - or at least starting to change.

If we're really slipping back into a bear market, what happens next? If the bear gets his jaws around us, he's going to squeeze. It's going to hurt. But what's really daunting about this scenario is that so many of us are simply unused to this sort of pain and suffering. We're used to getting what we want when we want it. That's all the result of not saving and getting into debt. You never have to sacrifice. You see something and you buy it - even big things like cars and houses. What happens when that fantasy world disappears?

Last Friday may have been a wake up call. It may have been a signal that it won't be long until we all find out what happens. Be prepared. 


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